SIFMA Provides Insight and Recommendations for Revitalizing Private-Sector Mortgage Funding
Washington, DC, August 8, 2014 - SIFMA today provided insight and recommendations regarding the development of a functioning private-label securitization (PLS) market that can support housing finance. Specifically, SIFMA is responding to Treasury's request for comment on the obstacles to PLS market growth and how these challenges can be addressed. SIFMA's letter represents the comprehensive views of both buy and sell side members.
"SIFMA strongly supports Treasury's focus on restoring private-sector securitization. As we look to the future of housing finance, it is imperative for the private sector to play a more active role," said Kenneth E. Bentsen, Jr., SIFMA president and chief executive officer. "PLS can and should play a bigger role than it does today. A robust PLS market will promote a sustainable housing market recovery that spurs economic growth and continued access to credit. We commend Treasury for proactively seeking input on issues that are preventing a more robust PLS market, and offer these comments to help housing policy move in a positive direction."
SIFMA provides answers to Treasury's specific questions regarding key obstacles to PLS market growth. The continued dormancy of the PLS market is due in part to the lingering effects of poor origination practices during the housing boom and the resulting reluctance of sophisticated investors to buy senior debt. However, the PLS market is also constrained by other factors including market dynamics, regulatory uncertainty, disagreement over roles and responsibilities of transaction participants, and the comparative advantage provided to GSE and FHA mortgage-backed securities due to government guarantees and preferential regulatory treatment. SIFMA's letter outlines in greater detail specific obstacles such as:
Economics: PLS execution generally comes at a higher all-in "cost" than GSE and bank portfolio execution today. SIFMA members believe there is a need for investors to have greater confidence to invest in mortgage credit risk in the PLS market, which would make PLS pricing more favorable and increase liquidity. Efforts to improve PLS markets should focus on reducing current roadblocks, leveling the playing field, and increasing the competitiveness of PLS so that issuance can rebound over time.
Investor Concerns: Investors continue to express a number of concerns regarding data and transparency of cash flows; documentation; the roles and responsibilities of transaction participants, enforcement of contractual terms; and eminent domain and other ex-post policy changes, among others concerns listed in SIFMA's letter.
Originator, Sponsors & Issuer Concerns: Issuers of PLS need to be able to estimate future costs of doing business in order to be willing to commit capital. The current level of uncertainty in the regulatory, legal and policy environment makes this very difficult. Along with economic factors discussed above, this uncertainty undermines issuer and sponsor incentives to increase their PLS issuance.
Unclear Housing Policy and Conflicting Signals: Uncertainty regarding the direction of GSE reform and broader housing policy questions have discouraged PLS issuance. Issuers and investors are not likely to build the infrastructure necessary for a vibrant PLS market until they have a better understanding of how the government's role in mortgage funding will change. Further, conflicting signals from policymakers regarding acceptable mortgage practices have also been detrimental to PLS issuance. Policymakers are exhorting originators to loosen credit standards, but certain policy actions have had the effect of driving investors away from PLS or causing originators to lend more conservatively. A clear direction for the future of housing finance reform would support greater private investment in the mortgage market.
SIFMA's letter offers high-level suggestions for how to address these obstacles and welcomes further discussion with policymakers. SIFMA members believe that policymakers should continue the active dialog that has begun regarding the appropriate structure of our housing markets, and drive towards a more cohesive view on what is needed from our housing finance system. SIFMA members suggest that:
GSE Reform Should Move Forward: The appropriate level of loan limits and underlying credit profile of loans eligible for a government guarantee should be reviewed as these will help define the role of PLS. Reducing the government's footprint creates room for the PLS market to operate and grow.
Regulations Should be Finalized: Regulatory reform of securitization, including issues of disclosure, risk retention, and prudential issues, needs to be completed.
Policymakers Should Always Consider Costs Along With Benefits: Costs to originators and securitizers may be passed on and reflected in the cost or availability of credit.
Policy Risk Should be Mitigated: Policymakers need to take steps to build the confidence of mortgage investors that policy will not unexpectedly shift in the future, at a cost to investors. In particular, policymakers should ensure that eminent domain is not used to seize performing mortgages from PLS trusts
Industry Dialogue: SIFMA will also continue to engage members in dialogue about various aspects of market function that can be improved, and various standards and best practices that can be agreed among market participants.
The Securities Industry and Financial Markets Association (SIFMA) brings together the shared interests of hundreds of securities firms, banks and asset managers. SIFMA's mission is to support a strong financial industry, investor opportunity, capital formation, job creation and economic growth, while building trust and confidence in the financial markets. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.